Now, debt ceiling jitters

WASHINGTON — The fight over the government shutdown quickly moved Wednesday to a bigger showdown over raising the nation’s debt ceiling, as the first White House talks to solve the fiscal standoff failed to make any progress toward a deal.

President Obama and business leaders warned that the clash has raised the chances of a historic default on the national debt, which would occur if Congress does not agree to raise the $16.7 trillion debt limit later this month, and which could cause a new recession.

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After meeting Wednesday with President Obama, House Speaker John Boehner said the president “reiterated tonight he will not negotiate.” The Associated Press

Obama said investors should take more seriously the threat of a potential default, which global markets have brushed off for months as Washington’s usual partisan theatrics.

“This time, I think Wall Street should be concerned,” Obama said on CNBC. “When you have a situation in which a faction is willing to default on U.S. obligations, then we are in trouble.”

On Capitol Hill, senior Republicans began to suggest that a broad agreement to overhaul entitlements and the tax code could be used as a resolution to both the shutdown and the debt-limit dispute. But Democrats view that approach as hostage-taking and say Congress must reopen the government and authorize additional borrowing before serious negotiations can occur.

At the White House, Obama joined the Republican and Democratic leaders of Congress in a 90-minute meeting that Mitch McConnell, R-Ky., the Senate minority leader, called “cordial but unproductive.”

Leaders of both parties said afterward that Republican demands to defund or delay Obama’s signature health care law, which helped lead to this week’s shutdown, remain a critical obstacle to any agreement.

House Speaker John Boehner, R-Ohio, said the president “reiterated tonight he will not negotiate.”

“We’ve got divided government. Democrats control the Senate; Republicans control the House,” he said. “All we’re asking for here is a discussion and fairness for the American people under Obamacare.”

But Senate Majority Harry Reid, D-Nev., said the president was unbending, calling him “strong, strong, strong.”

He added, “One thing we made very clear in that meeting: We are locked in tight on Obamacare.”

The back-and-forth Wednesday came on the second day of a partial government shutdown that has furloughed 800,000 federal workers and appears likely to last for an extended period of time.

The next crucial deadline comes Oct. 17, the last day the Treasury Department estimates that the federal government is certain to have enough money to pay all its bills. Investors have also been demanding higher interest rates for U.S. Treasury bills in recent days, a sign of concern that the federal government could have trouble servicing its debt.

On Wednesday, there was growing realization on both sides of the aisle that lawmakers will likely have to deal with resolving the debt ceiling issue at the same time as the government shutdown. Some senior Republicans said they are ready to enter a more far-reaching discussion over entitlement programs, tax reform and the federal debt limit.

“I think we’re at a point where we need a broader solution here to not only the (temporary funding measure), but also the debt limit,” said Rep. Dave Camp, R-Mich., chairman of the House Ways and Means Committee. “It’s right around the corner. I think they’re both going to have to get addressed.”

House Majority Whip Kevin McCarthy, R-Calif., agreed. “The president should start negotiating,” he said. “I’d like to just get one agreement” to reopen the government and raise the debt limit “and be done with it.”

Obama and Senate Democrats have so far refused to negotiate over either issue, saying they have already agreed to locking in lower funding levels favored by Republicans and that paying the nation’s bills – which raising the debt ceiling would do – is non-negotiable. Broader budget issues can be discussed after the government reopens and the debt limit is lifted, they said.

“Once we reopen government, I propose a House-Senate joint conference to work out the nation’s long-term fiscal challenges,” Reid said. “Both sides have priorities, but we want to move forward.”

The clash is starting to raise concerns in markets that the two sides will not find agreement before Oct. 17. Investors are already demanding much higher returns on U.S. Treasury bills that aren’t paid back until after that date, reflecting a higher risk assessment.

In daily market-monitoring discussions with Wall Street firms Wednesday, Treasury officials said there were new fears among investors that a deal might not be reached until the final hours, which would cause intense market volatility.

A U.S. default, which has never happened before, would lead to a dramatic cut in federal spending and delays in Social Security checks and could undermine the traditional U.S. role as a financial safe haven.

“There’s precedent for a government shutdown; there is no precedent for default,” Goldman Sachs chief executive Lloyd Blankfein said Wednesday after he and several other business leaders met with Obama at the White House. “We’re the most important economy in the world. We’re the reserve currency of the world.”

Both sides harbor hopes that the shutdown and the looming default deadline increase their political leverage.

“It’s pretty straightforward that the shutdown is hurting Republicans and weakening their standing,” a senior Democratic aide said.

But Republicans argue that the painful consequences of breaching the debt ceiling gives them more power to demand policy changes.

“This position that is being taken by the majority leader in the Senate, as well as the president, that there will be no negotiations, is not something that I think the American people would want,” said House Majority Leader Eric Cantor, R-Va.

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